5 Breakout Trades to Avoid Eurozone Fallout - 8524 views

BALTIMORE (Stockpickr) -- Europe is driving price action this morning, pushed by the “Aha!” moment that risks in Italian government debt are more than investors had previously priced in. That’s sort of a surprising realization -- Italian sovereign debt has been priced dramatically below the rest of the PIIGS on a debt-to-GDP basis for the last several months.

So it’s not exactly clear why yesterday was the tipping point that ratcheted yields on the Italian government’s bonds to near 15-year highs.

Even so, investors should expect Europe to continue to be the biggest factor effecting stocks here at home. That comes at a fairly significant time too -- stocks are trying hard to hold newfound support at 1225 in the S&P 500. While they’re succeeding now, it’s going to be crucial for the S&P to catch a bid below that level for this rally to continue. In the meantime, there are still technical setups worth watching right now.

Technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.

Here’s a look at five new technical setups that could deliver breakout gains to your portfolio this week even as eurozone fallout impacts the broad market.

Prudential Financial

$26 billion insurance and financial firm Prudential Financial (PRU) has been having an underwhelming year in 2011, dragged down by the sinking tide of the financial sector as a whole. But this stock could be on the verge of a turnaround thanks to an ostensibly bullish setup in shares.

From a technical standpoint, Prudential is mirroring the broad market right now. Shares had been hitting their head on $52 resistance for the last few months, only to break out above that level at the end of October. Now shares are forming a throwback, a return to retest that $52 level that’s now become support.

Essentially, you can think of a throwback as a second chance to take a low-risk trade on a stock. While the initial breakout above $52 signaled a major shift in Prudential’s supply-demand equation, a bounce off of $52 now provides an entry at the same price (now that shares have confirmed demand there). The operative word here is “bounce” off of $52 -- we’ll want to see that that price is actually holding up as a support level now.

If you do decide to take this trade, I’d recommend placing a protective stop right at the 50-day moving average.

Apache

Independent energy company Apache (APA) is another name that’s gotten hammered this year, dragged lower as waning demand for oil and gas caused a drop in energy commodity prices. Like Prudential, though, Apache is a stock that’s on the verge of a technical turnaround in shares.

That’s thanks to an inverse head and shoulders setup. The inverse head-and-shoulders setup is a formation that indicates exhaustion among sellers -- and admittedly, this pattern in particular looks pretty exhausted. Frankly, it’s not your “textbook” inverse head and shoulders pattern. But while its appearance is a bit less defined than the norm, the trading implications are exactly the same.

This setup has a neckline at $105 -- that’s the price level that we’ll need to see get breached before it makes sense to take a position in this stock. Until then, it’s not a high probability trade. When that price gets taken out, I’d suggest a protective stop just under the right shoulder at $95.

Another (slightly more typical) example of an inverse head-and-shoulders setup is taking place in another energy stock, Patriot Coal (PCX), right now. In fact, the setup in Patriot Coal has already broken out above its neckline level -- but like the throwback we saw in shares of Prudential, this stock is offering traders a second low-risk entry.

Patriot pushed above its neckline level alongside the broad market at the end of October, only to get caught up by the ensuing weakness in stocks. Since then, shares have been consolidating above the $12 neckline, a price level that’s actually acted as pre-existing support as far back as August. The technical significance of that $12 price is important right now -- it increases the likelihood that shares will be able to make it higher.

Traders should be looking for a thrust off of that $12 level as a signal to be buyers.

Dunkin’ Brands Group

Recent IPO Dunkin’ Brands Group (DNKN) is the firm behind the Dunkin’ Donuts and Baskin-Robbins restaurant franchises -- and it’s one of the highest-profile firms to go public in 2011. While IPOs are typically trickier to trade than your average established name, there’s a solid opportunity shaping up in shares of Dunkin’ this week.

Since its first day of trading, Dunkin’ has been locked inside a horizontal channel with resistance at $30 and support at $25, price levels that have each been tested three times since shares started trading; it’s a perfect example of an “if/then trade.” Essentially, if shares break out above $30, then it’s time to be a buyer. If shares break down below $25, then Dunkin’ turns into a short candidate.

Since Dunkin’ is a recent IPO, its trading implications are actually much stronger. From a psychological standpoint, a breakout above $30 means that everyone is sitting on profits on their positions, while a crack below $25 means that everyone who bought shares on the open market is sitting on losses. That factor is going to have a big impact on how eager investors are to unload or pick up more shares as we approach year-end.

Last up this week is $174 billion telecom company AT&T (T), one of TheStreet Ratings' top-rated telecom stocks. AT&T has had its share prices stifled in 2011 by concerns over its troubled merger plans with T-Mobile. Now that the outcome is slightly clearer, so are AT&T’s technicals.

Like the rest of the market, AT&T bottomed at the start of August, but since then, shares have been forming an ascending triangle setup. Simply put, an ascending triangle is a formation that’s characterized by a horizontal resistance level acting as a price ceiling for AT&T at $29.50, with uptrending support below. As shares bounce in between those two technically significant price levels, they’re getting squeezed closer to a breakout above that resistance level. The breakout above $29.50 resistance is the buy signal to watch for.

14-day RSI has been providing bullish confirmation for this setup as shares make their way up to test resistance. While that adds to the likelihood of an upside breakout, the trading signal still needs to be the price breakout itself. If you take this trade, I’d recommend a protective stop just below the 200-day moving average.

At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.